Shell’s Kitimat LNG plant under pressure as new boss reins in spending

CALGARY — Royal Dutch Shell PLC could delay plans to build a liquefied natural gas terminal on Canada’s West Coast as the company’s new boss reins in spending on major projects, dealing a blow to British Columbia’s export ambitions.

Industry sources say the European oil major has been trying to sell some of its B.C. natural gas holdings and may postpone a decision to go ahead with the export project as new chief executive Ben van Beurden ushers in a tighter spending regime at The Hague-based company.

“I think they’ve got too much on their plate, and the return on this is way down the road,” said one source, who has worked with Shell but did not know if any decision had been taken. “If they don’t give up on it they may just decide to delay it.”

Major energy companies are under pressure from investors to focus spending and boost returns as costs rise and the outlook for oil prices weakens.

Shell declined to comment on its Canadian plans or potential sales. The world’s No. 3 oil company said last week fourth-quarter results due at the end of the month would be “significantly” lower than last year, blaming higher exploration expenses and lower production volumes.

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“Our 2013 performance was not what I expected,” Mr. van Beurden said in a statement Friday announcing a cut in forecast fourth-quarter profits to $2.2-billion, from $7.3-billion a year earlier.

A decision on whether to build LNG Canada, a joint venture with Korea Gas Corp., Mitsubishi Corp. and PetroChina Co. Ltd., is not expected until 2015.

But a delay to the 1.7-billion-cubic-feet-a-day venture would set back plans to open new markets for Canadian gas. B.C. Premier Christy Clark is counting on LNG and a drilling boom to spur jobs and help cut provincial debt even though the projects’ various corporate backers have yet to formally commit to building the plants.

The province is currently locked in negotiations with the industry over fiscal terms that could include a tax on plant output or income. Companies have warned against slapping an onerous levy on the capital-intensive projects, arguing the sector will lose a competitive edge to rival jurisdictions.

Shell, long considered a frontrunner in Canada’s LNG race, has touted its partnership with three large natural gas buyers as a key advantage for the project compared to rival schemes.

But KOGAS last year indicated it wants to sell a portion of its 20% ownership stake in the plan. Industry experts have also questioned the economics of building several export terminals at once, as activity in neighbouring Alberta’s oil sands stretches demand for materials and labour.

Analysts say LNG Canada is a potential casualty of a tighter spending regime under Mr. van Beurden, who took control of the company this month and is expected to set out his plans for the European major at a Management Day in March.

“I think in their case they’d be under more pressure to push it out than others,” said Robert Mark, a director and analyst at MacDougall, MacDougall & MacTier Inc. in Toronto. “They’ve got a new CEO and he really changed gears at that company when he came in.”

In December, Shell cancelled plans to build a US$20-billion plant in Louisiana that would convert natural gas into diesel and other transportation fuels, citing concerns over rising costs and future oil and natural gas prices.

The company is also forging ahead in Alberta’s oil sands, where project costs have started to edge up. In October executives sanctioned Carmon Creek, a steam-driven project in the province’s northwest expected to yield 80,000 barrels of bitumen a day in two phases starting in 2017. Analysts estimate the scheme could cost more than $3-billion to develop.

Shell has approval to expand its existing Jack Pine bitumen mine by 50%, although that project faces a court challenge from First Nations. The company has also committed $970-million as part of a six-year agreement made in January 2012 to explore four deepwater parcels offshore Nova Scotia on Canada’s East Coast.

The Anglo-Dutch major’s Canadian LNG venture is “already third in line” on the West Coast behind rival projects led by Chevron Corp. and state-run Petronas of Malaysia, Mr. Mark said.

“Certainly of those three they would be the most likely to slow down their process and maybe be a bit more leery about committing capital,” he said.